Everyone expected last year to be the year that Middle Eastern gold demand came alive. Recent interpretations of Sharia law indicated that it would be OK for Muslims to own paper gold, such as ETFs, rather than just physical gold held as a wealth asset.
Because of the increasing demand, most market watchers called the changes positive and were looking for more.
It looks like the next round has arrived. Dubai announced they are launching a spot gold contract late this March. While traditional Islamic investors may continue their caution, watching both adoption of this new trading vehicle and acceptance by Sharia courts, it is expected that the new contracts will attract increasing amounts of interest over the next year. At that point, with any initial issues discussed and ironed out, we expect to see more Islamic funding involved in gold trading.
What would this do to the gold market? Nothing more, and nothing less, than you’d expect from more demand. In Econ 101 you were taught that more demand drove up prices. That is true in general, but markets also have a negotiation phase where the sellers and buyers negotiate over price. One of the tenets of Shariah investing law prohibits making a profit from trading gold, among other things, at another’s expense. This is commonly understood as a restriction on speculation, but holding gold as a long-term wealth asset is not prohibited.
So this Gold Enthusiast expects increased gold demand from Islamic sources over time. There will probably be more Sharia-acceptable trading vehicles developed as we go along. The character of this involvement indicates it will drive a floor under gold prices, rather than quickly ramping them up. And of course, price floors are called support – which is what higher prices are built on. At first we’re looking for more stability underneath, which means more looking up for the future. Maybe not a big quick increase from this one demand, but a welcome addition.
Signed, The Gold Enthusiast
DISCLAIMER: The author has no positions in any mentioned security. The author is long NUGT and JNUG, and may add to or sell these positions in the next 48 hours.